Subsidy Nation

How much will the Affordable Care Act (ObamaCare) cost us? Craig Eyermann’s July 25th blog post lays out the various tax increases that are expected under the Act. Another way of looking at the Act and the taxes that will be needed is provided by the Kaiser Family Foundation’s subsidy calculator. The calculator provides estimates for the expected federal subsidies to families with different income and age profiles. For example, a family of four headed by a person age 50 and earning $80,000 annually can expect an annual subsidy (in the form of a cashable tax credit) of approximately $9,258. A family of four earning $90,000 can expect a subsidy of $8,308. These whopping subsidies will go to families who do not receive health insurance through their employer. Note that if your employer does not provide health care your cash salary, as a rule, is higher because employer costs are lower.

Families receiving health insurance provided by their employers already receive health-care subsidies as the value of their employer-provided health care is exempted from taxable income. So, how much subsidy do these families actually receive? A family earning $80,000 in cash and receiving $10,000 in health insurance benefits receives a subsidy of about $3500 from this tax loophole. For the U.S. as a whole, the estimated annual value of the current health care loophole subsidy is estimated to be around $177 billion.

ObamaCare will provide new and enormous subsidization of traditional lower and middle-income families. When the middle class families who don’t qualify for Medicaid and receive employer-provided health care realize that their subsidies are only a fraction of the subsidies given to middle-class families who buy insurance privately through one of the new exchanges (for example, $3500 versus $8,308), it’s not too difficult to figure out their reaction: “Give us the big subsidy too!” Fear not, my liberal economics colleagues have already anticpated this and are working on the specifics of extending ObamaCare to everyone. Goodbye budget!

Before ObamaCare becomes universal, expect much game playing to occur as families and businesses seek to maximize subsidies and profits. Expect the overall costs of ObamaCare to rise far beyond official estimates.

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